Issue 73 - Stanford Lawyer - Stanford University

DISCOVERY
37
STANFORD
LAWYER
Only where there is a tragedy of the commons
do we insist on complete or relatively complete
internalization of externalities. There is no tragedy
of the commons in intellectual property. A
tragedy of the commons occurs when a finite natural
resource is depleted by overuse. Information
cannot be depleted, however. Indeed, copying
information actually multiplies the available
resources, not only by making a new physical
copy but also by spreading the idea and therefore
permitting others to use and enjoy it. Rather than
a tragedy, an information commons is a comedy
in which everyone benefits.
This doesn’t mean that intellectual property
law is a bad idea. Rather, the basic economic justification
for intellectual property law comes from
what was only an occasional problem with tangible
property—the risk that creators will not make
enough money in a market economy to cover
their costs. Information is different from ordinary
goods because the marginal cost of reproducing it
is so low. In a private market economy, individuals
will not generally invest in invention or creation
unless the expected return from doing so exceeds
the cost of doing so—that is, unless they can reasonably
expect to make a profit. To profit from
a new idea or a work of authorship, the creator
must be able either to sell it to others for a price
or to put it to some use that provides her with a
comparative advantage in a market.
Selling information requires disclosing it to
others. Once the information has been disclosed
outside a small group, however, it is extremely
difficult to control. If we assume that it is nearly
costless to distribute information to others, it will
prove virtually impossible to charge enough for
information to recoup any but the most modest
fixed-cost investments. If the author of a book
charges more than the cost of distribution, hoping
to recover some of her expenditures in writing the
work, competitors will quickly jump in to offer
the book at a lower price. Competition will drive
the price of the book toward its marginal cost—in
this case the cost of producing and distributing
one additional copy. In this competitive market,
the author will be unable to recoup the fixed cost
of writing the book. If this holds generally true,
authors may leave the profession in droves, since
they cannot make any money at it. The result,
according to economic theory, is an underproduction
of books and other works of invention and
creation with similar public goods characteristics.
Intellectual property, then, is not a response
to allocative distortions resulting from scarcity, as
real property law is. Rather, it is a conscious decision
to create scarcity in a type of good in which
it is ordinarily absent in order to artificially boost
the economic returns to innovation. But solving
the “problem” of intellectual property does not
require complete internalization of externalities.
How do the implications of my approach
differ from the free riding argument The critical
difference is that intellectual property law is
justified only in ensuring that creators are able to
charge a sufficiently high price to ensure a profit
sufficient to recoup their fixed and marginal
expenses. Sufficient incentive, as Larry Lessig
reminds us, is something less than perfect control.
Economic theory offers no justification for awarding
creators anything beyond what is necessary to
recover their average total costs.
What’s Wrong with
Overcompensating Creators
The argument so far shows that there is no economic
justification for granting inventors and
creators the right to control positive externalities
flowing from their creations, except to the extent
necessary to enable them to cover their average
fixed costs. But, the reader might object, showing
that there is no need to grant such control doesn’t
compel the conclusion that there is anything
wrong with giving creators greater control over
positive externalities. Wouldn’t it be easier just to
treat intellectual property rights as absolute
There are a number of costs to granting overbroad
intellectual property rights. These costs fall
into five categories. First, intellectual property
rights distort markets away from the competitive
norm, and therefore create static inefficiencies
in the form of deadweight losses. Second, intellectual
property rights interfere with the ability
of other creators to work, and therefore create
dynamic inefficiencies. Third, the prospect of
intellectual property rights encourages rent-seeking
behavior that is socially wasteful. Fourth,
enforcement of intellectual property rights imposes
administrative costs. Finally, overinvestment in
research and development is distortionary.
None of this is intended to suggest that intellectual
property is a bad idea. Far from it. Rather,
the point is that we cannot and should not seek